Financial Markets Relatively Stable in New Year

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1 January 22, 2014 Financial Markets Relatively Stable in New Year Every January brings some uncertainty to the financial markets. Trading activity slows down considerably in the two weeks of Christmas and New Year s, and when investors get back to work in early January, the results are often unpredictable. For the first 18 days of 2014, the financial markets have been relatively stable. There have been no major new announcements from the Federal Reserve. The biggest news on the U.S. economy so far this year is probably the monthly federal jobs report released on January 13, which surprised economists by showing the lowest monthly job growth since January, This announcement was followed by a slight decline in treasury yields. But the impact was surprisingly small, perhaps since many economists seem to believe this report was either inaccurate (and will be revised upward) or that it resulted from a temporary reduction in jobs due to cold weather. From December 31, 2013 through the end of Friday (January 18), the three major U.S. stock indices have all changed by less than 0.6% (with the S&P 500 and the NASDAQ Composite Index up slightly and the Dow Jones Industrial Average down slightly). The yield on the benchmark 10 year U.S. Treasury Note closed 2013 just above 3.00%, the highest it had been since July of By January 18, that yield had declined to 2.83% - more typical of its trading range since late June of Municipal Bond Yields Decline on Strong Demand, Weak Supply The municipal bond market was very quiet the first week of January. We have now had two weeks of more normal activity levels, and the results have been very positive for issuers. The table below shows changes in national indices of bond yields from January 3 to January 17. In general, these indices of yields declined by.20% to.30%.

2 Trends in Municipal Bond Yields January 3 to January 17, 2014 January 3, 2014 January 17, 2014 Change AAA Yields* 5 Years 1.32% 1.13% -0.19% 10 Years 2.79% 2.59% -0.20% 20 Years 3.89% 3.61% -0.28% 30 Years 4.20% 3.90% -0.30% Bond Buyer 20 Bond Index** 4.75% 4.55% -0.20% Source: * Thomson Reuters Municipal Market Data ** The Bond Buyer. Average yield on a portfolio of municipal bonds maturing in 20 years, with an average rating of AA/Aa2. The actual results of bond sales over the last two weeks have been even better than these national indices would indicate. A lot of this has to do with supply and demand factors. The supply of new bond issues for sale has been relatively light over the last two weeks. The Bond Buyer reports new-issue volume (total amount of new municipal bonds sold) of approximately $2.4 billion the week of January 6 and $3.8 billion the week of January 13, compared with an average of approximately $5 billion per week in At the same time, there are many bonds that either mature or are redeemed on January 1 and February 1, so investors have money to reinvest. In addition, municipal bond mutual funds last week reported net inflows of funds, following 33 weeks of net outflows. (The Bond Buyer, January 17, 2014) All of this adds up to lots of investors and underwriters competing to buy a limited supply of bonds. In December of last year, we were frequently seeing one to five bids on competitive sales of bonds. As the attached sale listing shows, issuers received as many as 13 bids on competitive sales during the past two weeks. In some cases, the average rates on the bonds sold were a full 0.50% less than we had estimated in December. Over the last two weeks, yields on municipal bonds have generally declined more than treasury yields. As of last Friday, the ratio of the yield on a 10-year AAA-rated muni to the 10- year Treasury note was at 91%, well below the average of the last several years.

3 These lower yields may mean that some bond issues particularly refunding issues that did not seem to be advisable in November or December may be more feasible now. On the other hand, if supply and demand for municipal bonds become more balanced, that could lead to increases in rates. Be sure to consult your Ehlers financial advisor if you are considering issuing debt. Moody s Implements New Rating Criteria for Local Governments On Wednesday, January 15, Moody s Investors Service announced that it was immediately implementing new rating criteria for General Obligation debt of local governments. The new criteria, which have been discussed in past editions of this Commentary, were first outlined in a Request for Comment in August of The final version is very similar to the original proposed version. In the new rating criteria, the percentage of the rating based on debt was increased from 10% to 20%, including 10% directly based on pension obligations. These obligations are calculated using a new Moody s methodology implemented in April 2013, rather than using the liabilities directly from a local government s audit. In many cases, this will result in greater liabilities than shown in audits. The percentage of the rating based on economic factors (e.g,. tax base and socioeconomic factors) was reduced from 40% to 30%. In addition, Moody s is introducing a scorecard that more specifically quantifies expected values for several of the most important factors considered in a rating. Also on January 15, Moody s announced that it had placed the ratings for 256 local governments on review as a result of the new criteria. Of these 256 local governments, 132 are on review for possible upgrades, and 124 are on review for possible downgrades. All of these ratings will be reviewed within the next 180 days. If your entity is on the list for review and you are an Ehlers client, you should have already received notice both from Moody s and from Ehlers. SEC Delays Effective Date of Municipal Advisor Rule We have written extensively in past editions of this commentary about the long and complex process of federal regulation of Municipal Advisors (including firms like Ehlers), which was mandated by the Investor Protection and Securities Reform Act of 2010, more commonly known as the Dodd-Frank Act. On September 13, 2013 the Securities and Exchange Commission (SEC) released their final rule on the registration of Municipal Advisors and set an effective date of January 13, 2014.

4 The final rule established requirements for books and records that Municipal Advisors must maintain. It also defined as a Municipal Advisor any firm that provides advice to a municipal entity relating to the structuring, timing and terms of municipal securities or investment of bond proceeds. This SEC definition could require engineering firms, accounting firms, energy conservation firms, attorneys, banks and underwriters to register as a Municipal Advisor if they provide this type of advice. On the afternoon of January 13, the SEC announced that it would delay the effective date of this rule until July 1, The SEC had received pressure from broker-dealer firms and banks to delay the effective date to give them more time to address the far reaching impact of the Municipal Advisor definition. The delay of the effective date will not result in any significant changes in the way that Ehlers interacts with clients or in our internal procedures to document our work. We will continue to update you as new developments occur in the regulation process. No Investment Advice or Offers Nothing in this article constitutes investment advice, including, but not limited to Ehlers filings with the Securities and Exchange Commission, Municipal Securities Rulemaking Board, or recommendations as to the suitability of any specific product or service. Ehlers provides public finance materials for convenience and information only. Additionally, this material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy Ehlers products or services.

5 Competitive Sale Results January 6, January 17, 2014 Sale Date Issuer St Par Amt (in millions) Issue Underlying Rating Credit Enhanced Rating BQ TIC / NIC Maturities # of Bidders Winning Bidder 01/06/14 Granite Falls, City MN 0.49 GO Equipment Certificates NR Y 2.69% Granite Falls Bank 01/06/14 Yellow Medicine East SD No MN 0.73 GO Alternative Facilities Bonds AA+ Y 2.35% Granite Falls Bank 01/06/14 Howard Lake-Waverly-Winsted SD No MN GO School Building Bonds AA+ Y N 4.12% Baird 01/06/14 Nobles County MN 5.70 GO Refunding Bonds AA+ Y 1.30% BOSC 01/07/14 Hinsdale SD No. 181 IL 9.15 GO Refunding Bonds Aaa Y 2.50% Piper Jaffray 01/08/14 Lake Land Community College Dist. No. 517 IL 3.87 GO Community College Bonds AA- Y 1.22% Raymond James 01/08/14 Lombard SD No. 44 IL 3.63 GO Limited Tax Refunding Debt Certificates Aa1 Y 1.92% Raymond James 01/08/14 Hibbing, City MN 0.83 Taxable GO Tax Increment Bonds AA N 5.00% Bernardi Securities 01/08/14 Tomah, City WI 9.76 GO Refunding Bonds A1 Y 2.96% Bankers' Bank 01/08/14 Madison Area Tech College District WI 9.29 GO Prom Notes Aaa/AAA N 1.65% Piper Jaffray 01/09/14 South St. Paul SD No. 6 MN GO School Building Bonds AA+ Y Y 3.66% FTN Fin Cap Mkts 01/13/14 Flossmoor SD No. 161 IL 9.54 GO Limited Tax School Bonds AA+ Y 2.17% FTN Fin Cap Mkts 01/13/14 Hesston, City KS 1.40 Temporary Improvement Notes NR Y 0.72% UMB Bank 01/13/14 Blue Valley SD No. 229 KS GO School Bonds Aaa/AA+ N 3.06% Citigroup 01/13/14 Hector, City MN 8.30 GO Temporary Water and Sewer Revenue Bonds AA+ Y Y 0.86% BOSC 01/13/14 Moorhead Area SD No. 152 MN GO School Building Bonds Aa2 Y N 1.67% Citigroup 01/13/14 Rothsay SD No. 850 MN 9.40 GO School Building Bonds AA+ Y Y 4.39% Piper Jaffray 01/13/14 Clear Lake School District WI 6.42 GO School Building and Improvement Bonds AA BAM ins. Y 3.44% Raymond James 01/13/14 DeForest Area School District WI 5.89 GO Refunding Bonds AA+ Y 0.62% BMO Cap Mkts GKST 01/13/14 Rice Lake Area School District WI GO School Improvement Bonds Aa3 Y 2.43% BOSC 01/13/14 Menasha, Town WI 2.11 Waterworks System and Sewerage System Revenue Bonds A1 Y 2.06% Raymond James 01/14/14 Summit Hill SD No. 161 IL 9.57 GO Refunding Bonds Aa2 Y 2.50% Janney Montgomery 01/14/14 Winfield, Village IL 4.25 GO Limited Tax Certificates Aa2 Y 3.91% Baird 01/14/14 Wichita, City KS 3.55 GO Bonds Aa1/AA+ N 2.11% Baird 01/14/14 Wichita, City KS 4.72 Taxable GO Bonds Aa1/AA+ N 3.57% Raymond James 01/14/14 Wichita, City KS 8.01 GO Airport Bonds Aa1/AA+ N 3.86% Baird 01/14/14 Johnson County Water District No. 1 KS Water Revenue Bonds Aa1/AAA N 3.45% Wells Fargo Secs. 01/14/14 Minneapolis-St. Paul Metro MN 8.00 GO Park Notes Aaa/SP-1+ N 0.27% Morgan Stanley 01/14/14 Minneapolis-St. Paul Metro MN GO Transit Notes Aaa/SP-1+ N 0.25% Morgan Stanley 01/14/14 Minneapolis-St. Paul Metro MN GO Wastewater Revenue Bonds Aaa/AAA N 3.28% Piper Jaffray 01/14/14 Minneapolis-St. Paul Metro MN GO Grant Anticipation Notes Aaa/SP-1+ N 0.30% Morgan Stanley 01/15/14 Northbrook Park District IL 4.01 GO Limited Tax Park Bonds Aaa Y 0.42% BOSC 01/15/14 Henderson, City MN 0.38 GO Bonds NR Y 3.20% Northland Securities 01/15/14 Inver Grove Heights SD No. 199 MN GO School Building Bonds Aa2 Y N 3.79% Citigroup 01/15/14 Geneva Joint SD No. 4 WI 1.00 GO Refunding Bonds AA- Y 1.26% BOSC 01/16/14 Batavia Park District IL 1.20 GO Limited Tax Park Bonds NR Y 1.12% Piper Jaffray 01/16/14 Park Ridge Park District IL 2.72 GO Limited Tax Park Bonds AA+ Y 1.99% Piper Jaffray 01/16/14 Park Ridge Park District IL 5.03 GO Park Bonds AA+ Y 2.78% Piper Jaffray 01/16/14 Kansas Development Finance Authority KS Revenue Bonds A1 N 3.71% Baird Offices in Minnesota: (800) Wisconsin: (800) Illinois: (800)